The core consumer price index in the US increased by 0.3% from February, which is the highest in seven months, bringing the annual reading to 1.6%, while the overall index surged by 0.6% in March or 2.6% y/y. In fact, the stronger-than-expected inflation data requires an assessment – whether the markets are dealing with an increase in inflationary pressure, which means that the probability of an earlier exit from the Fed's super-soft policy becomes more significant, or whether the increase in inflation is temporary, as Fed officials say.
In any case, a sharp inflation growth was already expected. Look at the yield graph of the inflation-protected 5-year TIPS.
At the same time, it should be noted that US Treasury yields have declined, that is, the market has already considered high inflation in quotes even before publication. It is possible that this reaction means that the positivity regarding the pace of the US economic recovery is slightly overestimated.
Today, the US dollar will be under pressure, but it is still strong in the long term. Therefore, its likely decline should be considered as a correction.
USD/CAD
The Bank of Canada's quarterly business outlook survey suggests higher expectations for future sales and generally stronger economic growth. The survey increases the probability that the BoC will announce a reduction in its bond-buying program at its meeting next week. If so, the markets may see a bullish impulse for the CAD.
Meanwhile, the recent CFTC report is not in favor of the Canadian dollar. The net long position was reduced by 302 million to 214 million, that is, it was practically liquidated. Moreover, the estimated price is rising, while the US dollar is confidently taking control in the long term.
It can be assumed that the base has already been formed. The USD/CAD pair desires to move upwards. The first target is set at 1.2720/40, while the next one is 1.2901, representing a 23.6% pullback from the annual decline.
USD/JPY
The Bank of Japan published its financial statements as of March 31. The assets rose to a record level of 714.2 trillion yen, which is not surprising, given the pace of government debt purchases, stock market support and anti-pandemic measures.
Another interesting thing is that the logic used by the Bank of Japan to implement QE has been completely discredited. At the time, it was argued that simply setting a 2% price target and easing monetary policy more decisively would bring the population's inflation expectations closer to 2%, which would eventually lead to actual prices reaching that level as well. However, inflation is not growing and does not even think to start growing, and inflation expectations have not increased.
On the other hand, budget revenues are declining, which is still due to the pandemic. The government's expenses are simply enormous. It is fair to note that an additional budget was adopted three times (the first in the amount of 27.5 trillion yen, the second - 31.9 trillion, the third - 15.4 trillion) just only for the 2020 fiscal year and just a few days after the beginning of the 2021 fiscal year, the programs of the first supplementary budget are being prepared. And this despite the fact that the main budget contains reserves of 5 trillion yen.
Meanwhile, orders for mechanical engineering products declined again in February and this time by 8.5%, with an annual decline of 7.1%. There are no signs that the situation can begin to improve in the near future. We can say that the real sector of Japan is in the mode of a weakly controlled decline.
It is clear that both BoJ and the government are extremely interested in the weak Japanese yen and will do everything possible to hinder it from strengthening. These are the fundamental foundations of the current situation in the Japanese economy.
The sell-off in the futures market has stopped, but the settlement price is still above the long-term average, and the first signs of a reversal have appeared.
The Japanese yen has corrected by 23.6% from the high last March, where it will try to find support. If the demand for risk persists, the correction may continue to the support level of 107.80. However, we must assume that the bullish trend continues and after the correction is completed, the USD/JPY will increase again. The target is set at 112.20/40.